German carmakers in emissions deal to try to avert diesel bans — European Bank Cuts Funds to VW Because of Emissions Fraud

BERLIN (Reuters) – German politicians and car bosses agreed on Wednesday to overhaul engine software on 5.3 million diesel cars to cut pollution and try to repair the industry’s battered reputation.

However, environmentalists said the plan – almost two years after Volkswagen (VOWG_p.DE) admitted to cheating U.S. diesel emissions tests – was too little, too late, and vowed to press ahead with legal action aimed at banning polluting vehicles.

Chancellor Angela Merkel’s government has come under mounting pressure for not doing enough to crack down on vehicle pollution and for being too close to powerful carmakers.

The issue has become a central campaign topic ahead of next month’s national election, prompting the government to summon car bosses to try to avert moves in some cities to force bans on diesel vehicles.

Justice Minister Heiko Maas said the agreement was only a first step, warning that bans on diesel vehicles could not be ruled out and urging car makers to focus more on consumers.

Ministers have been wary of angering the owners of 15 million diesel vehicles and damaging an industry that is the country’s biggest exporter and provides about 800,000 jobs.

Politicians stopped short of demanding costly mechanical modifications to engine and exhaust systems and said they had agreed for now on software updates for 5.3 million cars.

“We expect a new culture of responsibility from carmakers,” Environment Minister Barbara Hendricks, from the center-left Social Democrats, told a news conference, also adding the software updates were just a first step in cutting emissions.

A Volkswagen factory in Wolfsburg, Germany. The cut in financing from the European Investment Bank is the latest blow to the automaker’s reputation.Credit Michael Sohn/Associated Press

FRANKFURT — Volkswagen suffered another blow to its reputation on Tuesday after it was barred from receiving European Union research financing over allegations it misused a previous loan to cheat on emissions.

The decision by the publicly owned European Investment Bank at least temporarily deprives Volkswagen of low-cost financing it badly needs for research and development during a period of technological upheaval in the automobile business.

Traditional carmakers are struggling to keep up with upstarts like Tesla to develop electric vehicles capable of driving themselves. Volkswagen’s resources have already been depleted because of the company’s admission in 2015 that it programmed 11 million cars to fool regulators. Penalties and legal settlements in the United States totaled more than $22 billion, and cases in Europe are pending.

The hold on new loans came after the European Anti-Fraud Office, known as OLAF, concluded that Volkswagen misled authorities about how it used €400 million, or $472 million, that was meant to be used to develop engines that would be more fuel efficient and pollute less.

Volkswagen used some of the money to develop the EA 189 diesel engine, according to the European Investment Bank. That was the same engine at the heart of the emissions scandal.

The investment bank, which provides loans to companies for research and other uses, said Tuesday that it would not issue any new funds to Volkswagen while it examined what further action to take.

It also issued an unusually harsh critique of Volkswagen management.

“VW is an excellent company,” Werner Hoyer, the president of the European Investment Bank, said in a statement, “but it has not been served well by its top management since the beginning of this affair. The thousands of wonderful people who work for VW must feel betrayed.”

Volkswagen denied wrongdoing. “All funds received by Volkswagen from the European Union were used for the designated purpose,” the company said in its own statement.

Volkswagen has already repaid the €400 million loan, but the European Investment Bank still has €700 million in outstanding loans to the company’s heavy truck divisions, as well as to subsidiaries in Latin America and India.

The bank is an important source of financing for Volkswagen. The company has received €5 billion worldwide since 1990, the bank said. About one-third of the money was designated for technologies to reduce the cars’ environmental impact.

The Anti-Fraud Office found that Volkswagen misled the European Investment Bank about its use of so-called defeat devices, software that caused pollution controls in diesel motors to work properly only when the engine computer detected that an official emissions test was underway.

Volkswagen has pleaded guilty to charges in the United States that it installed defeat devices in nearly 600,000 cars, most of which were equipped with the EA 189 diesel engine.

The Anti-Fraud Office also referred its findings to prosecutors in Braunschweig, Germany, near Volkswagen headquarters in Wolfsburg. Klaus Ziehe, a spokesman for the state attorney’s office, said authorities were reviewing the findings and had not yet decided how to proceed.